A local area network (LAN) is a collection of computers and other devices connected to each other to enable communication and sharing. Small and mid-size firms that outgrow a few PCs and the physical sharing of disks often upgrade to LANs in order to facilitate collaboration and the sharing of business tools.

LANs started in the early 1980s as a way to share documents and printers easily. On a LAN, not every worker needs his or her own printer -- one printer can serve a workgroup or office. By hitting “print” from within Microsoft Word, for instance, the print request travels across the network to the shared printer.

In the same fashion, an application running on one computer -- dubbed a server -- can be shared among computers,  sometimes called clients. The server becomes a location where files are stored, applications are centrally managed, and access to files and resources is granted only to those who have the proper rights.

A LAN has the distinction of being in a smaller area -- hence the name local -- and that makes it ideal for a small business. When a computer network extends beyond a building or a campus or a small area via telecommunication lines, it becomes a wide area network (WAN). 

How LANs work

Before wireless technology made untethered communication possible, LANs were created by using cables to connect computers to each other.  Now, LANs are often a combination of wired and wireless connections.

A LAN comprises the software that allows the sharing of applications and devices, and also the hardware, meaning  the physical connections. Most networks are linked using Ethernet cable, which operates at various speeds, from ten megabits per second to up to ten gigabits per second. Other hardware components of a LAN are hubs, bridges, and routers. A hub consolidates the connection of various computers into a central location.

Ethernet cable has physical limitations -- the signal traveling over the wires can lose its integrity if the distance is too far. Bridges help extend and segment the network. And routers determine where requests are going and speed them to their destination.

Why LANs work for small business

More than 53 percent of small businesses have adopted some form of a LAN, says Laurie McCabe, vice president of AMI Partners, a New York-based research firm. Of those small businesses that are using LANs, 76 percent are using a server-based network, as opposed to a peer-to-peer network, where PCs are connected and share resources without a central server.

At some small businesses, a LAN is built the way it has been for decades: a server or servers run software and manage user accounts. But the notion of a LAN is changing, says Michael Dortch, principal business analyst with the Robert Francis Group. Businesses are considering moving away from physically running and managing applications on a server in the office, and instead paying someone to run the applications for them. The concept of a server is still there, only the server may be in another city or country. The connections from desktop PC, or client, to the server are Internet connections, not wired ones.

“SMBs don’t want or need LANs, any more than they want or need PCs,” Dortch says. “What they want and need is simple, consistent, affordable access to the IT-empowered tools and resources that help them to do business effectively and successfully. Growing numbers of SMBs are looking to hosted services as alternatives to physical LANs they have to implement and manage themselves.”